Jamie Dimon: More Municipal Bankruptcies (JPM, MUB)

J.P. Morgan's JPM CEO Jamie Dimon said that he sees more trouble ahead for U.S. municipalities in 2011 and believes that more bankruptcies are on the horizon. Dimon urged investors to use caution when wading into the municipal debt market, echoing comments from noted banking analyst Meredith Whitney in recent months. “There have been six or seven municipal bankruptcies already,” Dimon, 54, said yesterday at his company's annual health-care conference in San Francisco. “I think unfortunately you will see more.” In 2010, five municipal entities filed bankruptcy compared to 10 in 2009. The largest filing was a South Carolina toll road with more than $300 million in debt according to James Spiotto, head of the bankruptcy practice at Chicago law firm Chapman & Cutler. A number of cities have broached the prospect of bankruptcy, including Detroit and Harrisburg, Pennsylvania. The states that are perceived to be in the worse shape are California and Illinois. Over the last couple of months, municipal bonds have been rocked by a vicious sell off, sending yields soaring. In 2011, U.S. states are looking at deficits of around $140 billion, causing significant concern in the investment community. Dimon advised investors to be "very, very careful" when allocating capital in the municipal market. Investors that are looking to express a view on the municipal bond market should consider trading the iShares S&P Municipal Bond Fund ETF MUB, which has been absolutely slammed in recent months. Over the last 3 months, the MUB has fallen more than 9% and is currently sitting on new lows. Tremors in the U.S. municipal bond market have the potential to cause shock waves around the world. It is not at all improbable that the United States could be facing a similar situation to what is going on in Europe. Consumer, federal, and municipal debt levels all could pose a systemic threat to the continuing recovery. Do not be surprised if panic in the municipal bond market sparks a sell off in risk assets going forward into 2011. While at this point, that seems improbable, investors should keep a very close eye on the activity in municipals.